Anchoring
Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions. Background During normal decision making, anchoring occurs when individuals overly rely on a specific piece of information to govern their thought-process. Once the anchor is set, there is a bias toward adjusting or interpreting other information to reflect the "anchored" information. Through this cognitive bias, the first information learned about a subject (or, more generally, information learned at an early age) can affect future decision making and information analysis. For example, as a person looks to buy a used car, he or she may focus excessively on the odometer reading and model year of the car, and use those criteria as a basis for evaluating the value of the car, rather than considering how well the engine or the transmission is maintained. Focusing effect The focusing effect (or focusing illusion) is a cognitive bias that occurs when people place too much importance on one aspect of an event, causing an error in accurately predicting the utility of a future outcome. People focus on notable differences, excluding those that are less conspicuous, when making predictions about happiness or convenience. For example, when people were asked how much happier they believe Californians are compared to Midwesterners, Californians and Midwesterners both said Californians must be considerably happier, when, in fact, there was no difference between the actual happiness rating of Californians and Midwesterners. The bias lies in that most people asked focused on and overweighed the sunny weather and ostensibly easy-going lifestyle of California and devalued and underrated other aspects of life and determinants of happiness, such as low crime rates and safety from natural disasters like earthquakes (both of which large parts of California lack).Schkade, D.A., & Kahneman, D. (1998). "Does living in California make people happy? A focusing illusion in judgments of life satisfaction". Psychological Science, 9, 340–346. A rise in income has only a small and transient effect on happiness and well-being, but people consistently overestimate this effect. Kahneman et al. proposed that this is a result of a focusing illusion, with people focusing on conventional measures of achievement rather than on everyday routine. Anchoring and adjustment heuristic Anchoring and adjustment is a psychological heuristic that influences the way people intuitively assess probabilities. According to this heuristic, people start with an implicitly suggested reference point (the "anchor") and make adjustments to it to reach their estimate. A person begins with a first approximation (anchor) and then makes incremental adjustments based on additional information. ]] The anchoring and adjustment heuristic was first theorized by Amos Tversky and Daniel Kahneman. In one of their first studies, participants observed a roulette wheel that was predetermined to stop between the numbers 10 and 65. Half of the participants experienced the wheel stopping at 10 and half at 65. The participants were subsequently asked to guess the percentage of African nations that were members of the United Nations. Participants whose wheel stopped on 10, answered the question "Was it more or less than 10%?" by guessing low values (25% on average). In contrast, those participants whose wheel stopped at 65 answered the question with significantly higher value guesses than their counterparts (45% on average).Tversky, A. & Kahneman, D. (1974). "Judgment under uncertainty: Heuristics and biases". Science, 185, 1124–1130. The pattern has held in other experiments for a wide variety of different subjects of estimation. As a second example, in a study by Dan Ariely, an audience is first asked to write the last two digits of their social security number and consider whether they would pay this number of dollars for items whose value they did not know, such as wine, chocolate and computer equipment. They were then asked to bid for these items, with the result that the audience members with higher two-digit numbers would submit bids that were between 60 percent and 120 percent higher than those with the lower social security numbers, which had become their anchor.Edward Teach, "Avoiding Decision Traps", ''CFO'' (1 June 2004). Retrieved 29 May 2007. Anchoring in negotiations Anchoring, when used in negotiations refers to the concept of setting a boundary to outline the basic constraints for a negotiation. Subsequently, the anchoring effect in negotiations is the phenomenon in which we set our estimation for the true value of the item at hand.Tversky, A. & Kahneman, D. (1974). "Judgment under uncertainty: Heuristics and biases". Science, 185, 1124, 1128-1130. In addition to the groundbreaking experiment conducted by Tversky and Kahneman, multiple other studies have shown that “anchoring” has the ability to greatly influence the approximated value of an object.Orr, D. & Guthrie, C. (2005). “Anchoring, Information, Expertise, and Negotiation: New insights from meta-analysis”. Ohio St. J. Disp. Resol., 597, 21. For instance, although it is likely that negotiators are able to appraise an offer based on multiple points of interest, studies have shown that, in general, they tend to pick one aspect to focus on and from which to segue into their discussion. In this way, the concept of “anchoring” plays a strong role in developing an induced starting point from which they are then able to affect their counterparts offer. As shown by Tversky and Kahenman, the location of this point is largely influential in persuading the subconscious to define the value of the object within range of that point. A key when negotiating using anchors is Kahneman’s concept of anchoring-and-adjusting, also known as the idea of an offer and a counteroffer. Often, during an anchoring-and-adjusting process, the initial offer of the anchor determines what adjustments must be made in order to create a counteroffer.Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5, 297-323. Typically, although adjustments will be made, they will still be unlikely to fully counteract the initial offer and therefore, it is necessary to create a counteroffer. The process of initial anchor and ensuing counteroffer, creates a balance between the two negotiating parties, in which each side may offer concessions in order to reach the most mutually beneficial solution. Interestingly however, multiple studies have shown that the final agreements are more strongly influenced by the initial anchor than they are by any concessions made following it.Kristensen, H. & Garling, T. (1997). “The Effects of Anchor Points and Reference Points on Negotiation Processes and Outcomes.” Goteborg Psychological Reports, 2, 8:27. An example of the strength of anchoring in negotiations was tested in a study conducted by Northcraft and Neale. The purpose of the study was to measure the difference in the estimated value of a house between students and real-estate agents. In this experiment, both groups were shown a house and then given different listing prices. After making their offer, each group was then asked to discuss what factors influenced their decisions. In the follow-up interviews, (although the real-estate agents denied being influenced by the anchor) the results showed that both groups were equally influenced by the "anchor" of the listing price.Northcraft, G. B., & Neale, M. A. (1987). Expert, amateurs, and real estate: An anchoring-and-adjustment perpective on property pricing decisions. Organizational Behavior and Human Decision Processes, 39, 228-241. A second, ongoing example of the power of anchoring has been conducted during the Strategic Negotiation Process Workshops. During the workshop, a group of participants is divided into two sections: buyers and sellers. Each side receives identical information concerning the other party that they are encouraged to read before going into a one-on-one negotiation. Following this exercise, both sides debrief about their experiences. The results of these negotiations have shown that what and where the participants anchored had a significant effect on their success in the negotiation. In fact, with the proper anchor, the participants were not only able to increase the size of the pie but they were also able to obtain a larger piece of it. Dietmeyer, B. (2004). Strategic Negotiation: A Breakthrough Four-Step Process for Effective Business Negotiation. New York City: Kaplan Publishing. As shown by the examples above, anchoring plays an important role in the result of a negotiation. When used improperly or not at all, the impact of the anchor is decreased; however, when used correctly, the power of a good anchor can be decidedly influential. This aside, no matter what technique is employed, anchoring in negotiations remains a vital piece in determining a negotiation outcome. See also *Cognitive capture References * Del Missier, F., Ferrante, D., & Costantini, E. (2007). "Focusing effects in predecisional information acquisition". Acta Psychologica, 125, 155–174. Category:Cognitive biases Category:Decision making Category:Heuristics Category:Prospect theory